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August 22, 1991


The opinion of the court was delivered by: Mukasey, District Judge.


Plaintiff Securities Settlement Corporation ("SSC") sues defendant Lucy M. Jachera to recover the value of securities which SSC mistakenly delivered to Jachera's IRA securities account at the investment firm of Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch"). Plaintiff now moves for summary judgment pursuant to Fed. R.Civ.P. 56. As appears below, plaintiff's motion is granted in part and denied in part.

Defendant Jachera has impleaded Merrill Lynch as the employer of the broker who traded the securities in issue at defendant's request. Merrill Lynch moves for summary judgment dismissing the third-party claim and, for the reasons stated below, Merrill Lynch's motion is granted.

Plaintiff SSC is a clearing broker. As such, it performs back office and recordkeeping functions for its correspondent retail broker-dealers who sell securities to the public. Among SSC's duties are the receipt, delivery, and safeguarding of securities.

On December 2, 1982, defendant Lucy M. Jachera purchased 20,000 shares of Damson Institutional Energy ("Damson Institutional") and 20,000 shares of Consolidated Capital Institutional Properties ("Consolidated Institutional"), all at $1.00 per share, for her I.R.A. account at Thomson McKinnon Securities ("Thomson"). On April 29, 1986, Jachera transferred her I.R.A. account from Thomson to Moore & Schley, one of SSC's correspondent broker-dealers. In transferring the account, Thomson delivered the erroneous position of 20,000 shares of Damson Energy LP UT L P ("Damson Energy") rather than the correct position of 20,000 Damson Institutional.

In November 1986, Jachera again transferred her I.R.A. account, this time to Merrill Lynch. Jachera's broker at Merrill Lynch submitted to SSC an Authorization to Transfer Retirement Account (the "Transfer Statement") requesting that "20,000 DAMSON" and "20,000 CONSOLIDATED CAPITAL" be transferred from Moore & Schley to Merrill Lynch. SSC then executed the transfer, but mistakenly delivered the erroneous position of 20,000 Damson Energy securities found in Jachera's Moore & Schley account. (Finger Aff. ¶ 10) Furthermore, due to errors previously made by Thomson and SSC, Consolidated Institutional was written off Jachera's account.

In May 1987, SSC finally transferred the 20,000 shares of Consolidated Institutional to Jachera's Merrill Lynch account. But appearing instead on Jachera's Merrill Lynch account statement of May 29, 1987 were 10,052 shares of CONS CAP I OPPT TR 2 SBI — i.e., Consolidated Capital Income Trust ("Consolidated Income"), at $13 per share. (Finger Aff., Ex. E) Jachera had never owned shares of Consolidated Income, but she insists that she was unaware that the shares reported were different from the Consolidated Institutional shares that she did own. At the same time, Jachera's Moore & Schley statement reflected a long position of 9948 shares of CONSOLIDATED CAP INST PRO INVT — i.e., Consolidated Institutional. No price was reported for the latter security because it was not publicly traded.

In July 1987, Jachera instructed her broker at Merrill Lynch to sell the 10,052 shares of Consolidated Income for $132,181.12, and use the proceeds to purchase 6,000 shares of Par Pharmaceutical Inc. for $164,278.75. (Jachera Aff., 4/4/91, ¶ 15) Before the time of sale, Consolidated Income's name had been changed to Income Opportunity Realty Trust ("Income"). Jachera insists she had no idea that the Income/Consolidated Income securities were not the same ones she had purchased in 1982. Late in 1987, SSC discovered its error and realized that it had created a short position of 10,052 Income/Consolidated Income shares in Jachera's Moore & Schley account. (Finger Aff. ¶ 24) SSC then contacted Merrill Lynch about the mistake and discovered that Jachera had sold the position. In December 1987, when Jachera did not rectify the short position, SSC bought back the 10,052 units on the open market and compensated Moore & Schley for dividends never received. SSC's total cost was $104,872.29. (Finger Aff., Ex. D statement of 12/31/87)

In the months following the sale, Jachera engaged in several additional securities transactions, suffering substantial losses to her I.R.A. account as the market collapsed. By July 1988, Jachera's losses had completely erased her gain from the sale of the Income/Consolidated Income securities. (Jachera Aff., 4/4/91, ¶ 29) Jachera claims that she would not have suffered these losses, but for SSC's mistake that led her to believe that she had a gain with which to trade. (Jachera Aff., 4/4/91, ¶ 14)

During late 1988, SSC discovered its other mistake: delivering the wrong "Damson" security to Jachera's account in November 1986. Moore & Schley then sent a letter to Jachera asking her to return the Damson Energy security, but received no response. (Finger Aff. ¶ 12, Ex. B) In order to cover the short position, SSC bought back the 20,000 units on the open market at a cost of $10,000. (Finger Aff. ¶ 14) In 1989, Jachera finally sold the 20,000 Damson Energy shares for $10,144.48. (Defendant's Rule 3(g) statement ¶ 7)

Through August 1989, Jachera continued to own the Damson Institutional and Consolidated Institutional securities she had purchased in 1982. Jachera's Damson Institutional securities at some point had been converted to 813 units of "Damson Institutional Limited Partnership," a publicly traded security. On September 6, 1989, SSC sold the 813 units for $1,521.88 and credited that amount against Jachera's debit balance then owing to SSC. (Finger Aff. ¶ 15) SSC also credited Jachera with the dividends earned on the Damson Institutional securities before SSC sold them. (Finger Aff. ¶ 16) Jachera continues to receive dividends on Consolidated Institutional which SSC cannot sell because that security is not publicly traded. The dividends have been and continue to be credited against Jachera's debit balance. (Finger Aff. ¶ 26).

SSC brings the present action to recover the value of the debit balance in Jachera's account. As of March 8, 1991, the debit balance was $111,180.12.*fn1 Jachera has impleaded Merrill Lynch for indemnity or contribution should she be found liable. Both plaintiff SSC and third-party defendant Merrill Lynch now move for summary judgment against defendant Jachera.

SSC is a Delaware corporation with its principal place of business in New York City; Jachera is a New Jersey resident. The court has diversity ...

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